RTRS:Euro, shares steady as market brace for central banks
(Reuters) - European share prices and the single currency held their ground on Wednesday as markets waited to see if the European Central Bank and the U.S. Federal Reserve will respond to fresh evidence of slowing global economic growth.
Investors are most focused on the ECB's Thursday meeting to see how it plans to make good on promises by President Mario Draghi to preserve the euro. Few investors expect fresh monetary stimulus from the Fed at the end of its two-day meeting later on Wednesday.
"The market is relying on Mario Draghi's comments that the ECB will do whatever it takes to preserve the euro especially on his ‘believe me it will be enough' assertion," Mouhammed Choukeir, Chief Investment Officer at Kleinwort Benson said.
"On Thursday the European Central Bank may announce it will resume purchasing peripheral euro zone government bonds through its Securities Markets Programme (SMP). The question is how much is it prepared to spend?" he said.
However, European paymaster Germany has repeated its opposition to such a move which has tempered market expectations. The German central bank believes ECB bond-buying flouts European law banning monetary financing of governments.
MARKETS PREPARE
Since Draghi first made his comments of fresh support for the euro last Thursday, the broad STOXX 600 index of European companies .STOXX has risen about 4.5 percent although it gave up some of these gains on Tuesday on skepticism about whether the ECB would deliver.
On Wednesday the STOXX 600 index steadied at 261.60 points while the FTSEurofirst 300 index .FTEU3 of top European shares barely moved, registering just a 0.03 percent gain at 1,063.79 points. The index posted a solid 4.1 percent rise in July, its second-best monthly gain of the year.
The euro was flat at $1.2306, giving up some initial gains after German Bundesbank President Jens Weidmann said that governments overestimated the ECB's capacities and placed too many demands on it.
The single currency is well above Monday's low of $1.2225 but has stayed below a peak hit late last week of $1.2390 on optimism following Draghi's comments.
In the debt markets, where yields on Spanish and Italian debt have plunged from near unsustainable levels since Draghi's comments, sentiment was improving on Wednesday.
Italian 10-year government bond yields were down 12 basis points at 5.96 percent while equivalent Spanish yields were 5 bps lower at 6.73 percent. The appetite for riskier debt pushed 10-year German government bond yields 5.3 basis points higher to 1.34 percent.
"In our view, markets are a notch too hopeful about the magnitude and the timing of intervention from the ECB," analysts at Bank of America Merrill Lynch said in a note.
"However, we share the market view that the ECB meeting on 2 August will focus on interventions in the form of sovereign bond purchases, and less on interest rates," they said.
ECONOMIC GLOOM
The better tone in the debt market came despite data showing Europe and Asia's economic performance was worsening.
Germany's manufacturing sector contracted in July at its fastest pace in more than three years, according to the Markit Purchasing Managers' Index (PMI), released on Wednesday.
The PMI data also showed output flagged more than expected in Britain's manufacturing sector during July, dealing a severe blow to hopes that the country may get out of recession soon.
"It is consistent with a very sharp slowing in the global economy," said Jens Larsen, chief European economist for RBC Capital Markets.
The broader euro zone manufacturing sector contracted for the 11th straight month in July, the data showed.
Earlier, China's official factory purchasing managers' index fell to an eight-month low of 50.1 in July, suggesting virtually no growth in the world's second-biggest economy.
The Chinese data contributed to sharp fall in the greenback versus the Japanese yen, which touched a two-month low of 77.90 yen and came after signs of decelerating growth from other major Asian exporters including Japan, South Korea and Taiwan.
The Chinese data sent Brent crude oil to its lowest in almost a week before prices steadied just below $105 a barrel as traders await the next moves by central banks.
"We may see the market lighten its hold with the China PMI coming in below expectations, but it's not the end of the world, at least this week because, the main focus is still the (Fed) and ECB meeting," said Ben Taylor, sales trader at CMC Markets.
